For many of us, the stock market and all of its technical intricacies is an entirely foreign concept. The mind-boggling jargon and brash, risk-taking characters associated with the stock market are enough to make many conclude ‘nope, not for me’. However, strip away the buzzwords and the gambling mentality, and the trading industry is far more accessible that you may think.
The sensible side of stock market investing, together with the rise of online trading opportunities, has opened up the industry to anyone with a laptop and a willingness to learn. If you’re just getting started with online trading, here’s a rundown of the basics – you can also check out the best investment methods at Interactive Investor:
Choosing a Broker
If you’ve decided to get involved with online trading, your first step will be to choose an online stockbroker. This involves opening a brokerage account with a reputable online stockbroker or brokerage firm. You may choose to open an account with a general brokerage firm, or you might want to specify a bond broker, commodities broker or future broker.
Whether you choose a traditional, ‘full-service’ broker, or a discount broker, depends on how involved in the trading process you wish to be. A traditional broker provides investment advice, as well as reports on the progress of your portfolio. Discount brokers simply handle your investment transactions and leave the analysing and decision-making to you.
Learning the Trade(s)
Once you’ve signed-up with a broker, the next step is to learn the different types of trades you can make. There’s about a dozen different types of stock market orders, including: ‘stop orders’, ‘selling short orders’, ‘buy to cover orders’ and ‘bracketed orders’. When reviewing the various order types, it’s best to start with the most common and straightforward type of trade, known as a ‘market order’.
A market order involves buying shares at whatever the current market price is. Although this is one of the quickest orders to execute, the market price per share could change in the short time it takes to complete the purchase. If you’re investing in a more rapidly-moving stock, this type of trade does come with a significant risk. However, for slow-moving stocks, it’s one of the best investment methods.
Another important task for the novice trader is to review the various fees associated with trading and how to avoid ‘frictional’ expenses. Frictional expenses are costs that slow down your rate of return and reduce your overall gains. In many cases, frictional expenses are merely the price of doing business – but certain costs can be avoided or at least minimised.
The main expenses involved on online trading are the commission fees you pay to your broker. These fees vary from firm to firm, which is why shopping around for a fair, quality broker is essential. It’s also essential to be aware of the difference between the ask price and the bid price of an asset, also known at the ‘spread’.